ECB is about to lend trillions to banks

Press conference by Joaquín Almunia, Vice-President of the European Commission, on the launch of the consultation on the new state aid rules, (EC Audiovisual Services).

The institutionalisation of the Single Resolution Mechanism to deal with failing banks, a new tool to complement ECB’s Single Supervisory Mechanism (SSM), two cornerstones in building the European Banking Union, cannot be accomplished correctly, if member states were allowed directly or indirectly to support with public money their failing or about to fail banks, in breach of fair competition. To control this possibility the European Commission published yesterday evening its recommendation for stricter state aid rules for banks.

It was characteristic that at the time when two Cypriot banks were completely demolished, the Dutch government spent almost €4 billion to rescue a large financial group in trouble. The Cypriot banks disappeared, while the Dutch group is now theoretically able to expand to Cyprus just because it received free state aid.

Bank resolution

Actually the Commission wants in this way to complement its earlier proposal for the creation of a centrally controlled Single Resolution Mechanism under its own roof. Yesterday the European Sting writer Suzan A. Kane noted that “According to today’s Commission proposal the Single Resolution Board will be made up by representatives from the ECB, the European Commission and the relevant national authorities (those where the bank has its headquarters as well as branches and/or subsidiaries). Obviously the central authorities, the Commission and the ECB, would control the majority of votes in this Board”.

The enactment of the Single Resolution Mechanism has become a crucial point in the context of the European Banking Union, which is the new EU institution expected to change the economic functioning of the Eurozone and set the base for a higher level of political bondage at least between Eurozone member states. But it’s not only that.

Also yesterday the European Sting writer George Pepper stressed that, “It was not a coincidence that the Governing Council of the European Central Bank suddenly decided unanimously last week to further relax its monetary policy promising more and cheaper loans to all banks, exactly at a time when the US central bank, the Fed, is about to start calling back the trillions of dollars it spread around the world during the last four years, a large part of which has ended up in Europe”.

Inheriting the Americans

The idea is that there is going to be a change of guards in Eurozone’s financial universe, with the Americans withdrawing from the European capital markets and the ECB preparing itself to set the printers running in order to replace the dollars with euros. To be noted that the Americans are not leaving only the European capital markets but all the capital markets of the world, because the US central bank, the Fed, is ready to call back a large part of this freely printed dollars, before the western financial system hits again an iceberg.

The problem is that the American banks have managed to adequately recapitalise themselves a task that still lies ahead for the Eurozone lenders. It is characteristic of the size of the capital needs of the European banks, that the ‘mighty’ Deutsche Bank which was boosting that it doesn’t need a capital increase, was recently forced to conduct one with an outcome which was more than embarrassing. The German giant with feet of clay managed to attract only €3 billion, which is less than peanuts compared with its needs for new capital.

Things though are developing very fast, because the Americans have already started selling their European assets, and Eurozone has to be prepared to cover the gap with newly printed euro. However those euros, printed by the ECB, have to be introduced in Eurozone’s capital markets through central bank liquidity loans to European banks. The problem is that the European banks are in a very bad shape, with huge capital needs which cannot be covered from market sources, because there are not reckless enough investors to do that. Then the ECB will find it very difficult to lend them the trillions which are needed to cover the gap the Americans are to leave in the Eurozone capital market. In this basket there are not only Italian, Spanish, Portuguese and Irish bonds but also huge EU bank loans held by the Americans who want to sell them.

No state aid to banks?

In short there is an urgent need for Eurozone bank consolidation in order the lenders to be able to succeed the Americans and buy their assets with newly printed ECB money. It goes without saying that the ECB is ready to lend those trillions to Eurozone lenders like the Deutsche Bank, but there has to be a limit to the degree of leverage.

Obviously the large German and French banks want to play a leading role in absorbing the almost zero cost money from the ECB and with it buy the assets the Americans are about to sell. The deal is more that lucrative because it guarantees them a huge profit they don’t deserve, because they don’t have enough own capital to qualify for such huge ECB loans.

Now in view of this dead-end the European Commission is pressing Germany and France to accept its proposal for the swift creation of bank resolution authority under its roof. A quick breakthrough in the enactment of the European Banking Union may cover up the weaknesses of Eurozone banks. ECB’s supervision and a Bank Resolution Authority in Brussels may more or less cover the illnesses of Eurozone’s banks. Theoretically their solvency will be guaranteed by ECB’s supervision and the central resolution authority will be there to conduct an orderly winding down.

In this process though German and probably also French banks may think that they can keep for themselves the lucrative business. Obviously they count on the political leverage of their governments. Probably Berlin and Paris are already planning capital increases for their major banks with public money.

Stop to state aid

Possibly in view of this, the Commission issued yesterday its new proposal to contain a bit the appetite of the German and the French banks. The tighter control of state aid to banks is an institutional measure to cool the pressures by the big Eurozone banks. In this game banks and governments are on the same side. Understandably the big lenders are already pressing their governments to support them, in their quest to absorb the largest possible part of the money ECB is to spread around over the next months.

That is why the Commission published its new state aid rules for banks only hours after the proposal for the Single Resolution Mechanism. Of course at the end this Commission action may offer a great service to German and French banking giants, but this remains to be seen.